Tense Markets Await Fed Announcement
06/29/06 - 10:51 AM EDT
Liz Rappaport
Updated from June 28
The major stock averages advanced Thursday ahead of the conclusion of the Fed meeting and an expected 25 basis point rate hike. The morning's economic data was in-line with expectations and did not sway the market from its pre-Fed rally. "The market this morning shouldn't be taken any way," says Timothy Heekin, director of equity trading at Thomas Weisel Partners, adding that the FOMC meeting is just one of several cross-currents going on as the week comes to an end. There is the end of the quarter and the end of the half-year, the Russell rebalancing and the start of pre-announcements ahead of second-quarter earnings season. Heekin predicts stocks trade in a range through the summer without broad directional moves. He puts the S&P 500 in a range between 1245 and 1265. As of mid-morning the S&P 500 was recently up 0.77% at 1255.62, the Dow Jones Industrial Average was up 0.64% to 11,043.60, and the Nasdaq was up 1% at 2132.91. The Bureau of Economic Analysis made its final revision to first quarter GDP growth, putting the figure at 5.6%, in line with expectations and up from 5.3% previously. There was no change in the measure of the Fed's favorite inflation measure -- core personal consumption expenditures, which grew at an annual rate of 2% in the first quarter. But below the surface, some details point to the likelihood that the year-over-year monthly core PCE price index will rise to 2.2% in May. "Rounding obscured a slight upward revision" in the Bureau's measure of the price of services, which went to 2.04% from 2.00%, says Peter Kretzmer, economist at Banc of America Securities. "This increasing the chances of year-over-year monthly core PCE price index rising to 2.2% in May," he writes. Initial unemployment claims rose for the second week in a row, as 313,000 people filed claims in the week ended June 24. This was slightly higher than the 310,000 claims that economists expected. The four-week moving average declined for the fourth week straight, however, to a four-month low of 305,500, writes Gary Bigg, economist at Banc of America Securities. Friday brings May's personal income and spending data, and the PCE index for the month, which could put the Fed deeper into the corner in terms of inflation-fighting. Goldman Sachs economist Ed McKelvey forecasts a 0.23% increase from April. Given a 0.4 percentage point margin of error, rounding could make the difference. "The probability of an increase that rounds up to 0.3% is significant, as is the probability of a 2.2% print for year-to-year change," he writes. In the meantime, all eyes will be on the FOMC statement at 2:15 p.m. EST and what clues Bernanke may give about the direction of monetary policy going forward. As it awaits the Fed's decision, the market is being tossed between two dominant fears: One, that Bernanke and the Fed may sacrifice the economy's strength and overtighten to gain credibility. Two, the Fed will neglect inflation and allow it to run rampant. "It's damned if you do, damned if you don't," says Heekin. If his range-bound theory bears out, then if the pre-Fed rally may be met by selling, he says. "There is no directional catalyst," he says, adding the low volume on the exchanges recently also points to lack of conviction or interest in the market and the likelihood of range-bound market behavior. The moves will be company or sector-specific, he predicts. McDonald's (MCD Quote - Cramer on MCD - Stock Picks) was among the market's leaders Thursday, following an upgrade by Merrill Lynch.
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